Resource Documents: Economics (164 items)

Documents presented here are not the product of nor are they necessarily endorsed by National Wind Watch. These resource documents are provided to assist anyone wishing to research the issue of industrial wind power and the impacts of its development. The information should be evaluated by each reader to come to their own conclusions about the many areas of debate.

This study shows that in 2012, the total value of public interventions in 2012 in energy (excluding transport) in the EU-28 was €2012 113 billion: 10 billion to coal, 5 to natural gas, 7 to nuclear power, 8 to biomass, 15 to solar, 10 to on-shore wind, 2 to off-shore wind, and 5 to hydro.

Total support provided in the 28 Member States (in billion €2012), including EU level support – 2012

The levels of support do not reflect the proportional use of each energy source, where, e.g., coal represented 17.5% of energy consumption, natural gas 23.5%, nuclear 13.5%, and all renewables 11%.

Thus, per mtoe (million tonnes of oil equivalent) consumption, coal received 34 million € per mtoe, whereas all renewables received 216 million € per mtoe.

In terms of electrical energy, 1 mtoe is equivalent to 11.630 TWh. Therefore, coal’s 17.5% share of all (1,682.9 mtoe) energy consumption is 294.5 mtoe, which is equivalent to 3,425 TWh. Coal is used for more than electricity generation, however, and as seen in the next figure, it accounted for 27% of total 3,295 TWh electricity production, or 889 TWh – that is, only 26% of coal use was for electricity generation, and 26% of the subsidy to coal comes to less than 9 million € per mtoe.

Putting these data from disparate parts of this extensive report together, coal received a subsidy of 2.9 € per MWh of electricity generated. Wind – both on-shore and off-shore – received 57.7 € per MWh of electricity generated, or almost 20 times the subsidy of coal.

By similar calculations, the 2012 subsidies for electricity generation were 0.70 €/MWh for natural gas and 2.36 €/MWh for nuclear.

Natural gas generation contributes the largest share of Texas electricity, particularly during peak demand. During off-peak times, when demand can be a half or two-thirds of the daily peak, many power plants stand idle; operating reserves are needed, however, when demand increases again, or to react to sudden losses of generation or transmission problems caused by equipment failure or bad weather.

On days when temperatures peak in the 60s, non-residential customers use more than two-thirds of the power generated in the ERCOT region. On the hottest Texas summer days, electricity demand by residential customers quadruples to more than half of the state’s total load, peaking in the late afternoon. This requires thousands of megawatts of natural gas generation to be fired up, a flexibility not available with wind generation that is dependent on weather conditions.

Renewables need conventional power backup

Diversifying Texas’ energy portfolio has put wind and solar generation on the grid but has created a new quandary for grid managers: where can power be obtained quickly when the wind stops or clouds reduce solar yields?

When wind turbines produce less electricity than predicted, grid operators must compensate by relying on dispatchable power plants that can ramp up production quickly to meet demand, and ramp down due to rapid increases in wind generation.

Daily forecasts can give a general expectation of renewable output, but quick-ramping gas turbines have to be on standby to backstop renewables that are expected to produce only a fraction of their full operational capacity.

For summer 2014, even though Texas had more than 11,000 MW of total wind capacity, ERCOT counted on just 963 MW of wind generation being available. The lack of wind generation during summer peak demand means that energy planners, such as ERCOT, have to ensure that a lot of flexible natural gas generation is available to meet the reserve margin.

Wind producers occasionally have to curtail their operations during high generation due to localized transmission infrastructure constraints; this could be alleviated if economical local energy storage technologies existed.

Although peak solar energy production tends to coincide with peak demand, Texas’ limited solar capacity leaves CREZ transmission lines underutilized when the West Texas wind typically is lowest in early afternoon.

The reserve margin ordinarily meets the needs of the electricity market because grid operators can dispatch flexible generation to meet higher- than-expected demand or unexpected supply loss. When the operating reserves are insufficient, customers are asked to reduce consumption through demand response programs that reduce the load. In a worst-case scenario, forced rolling outages would be implemented.

Wind generation is lowest during the summer months when energy demand is highest.

The proportion of electricity generated from wind during the hottest summer day of 2013:

4 P.M. – Wind generation is near its lowest when overall demand is at its highest.

Wind has reliability challenges

Renewable energy poses reliability challenges. The leading concern is whether it can provide electric power every second of every day. Major renewable energy sources are fundamentally limited in how, where and when they can be used; the sun doesn’t always shine and the wind doesn’t always blow, so natural gas backup generation is needed.

Variability and intermittency

Wind power is tied to weather and thus produces variable energy output. Wind variability creates complications for grid operators working to integrate wind power into a grid not historically designed for fluctuations.

Historical wind generation data reveal that the peak production for the majority of Texas wind generation is at night and does not align well with the peak electricity demand during summer afternoons.

Non-coastal wind turbines generated only about 20 percent of their installed capacity during summer peak-demand hours, while coastal wind production was more than 50 percent of capacity in 2013.

Non-coastal wind represents 85 percent of both total installed wind capacity and annual wind generation in the ERCOT region.

Transmission lines for wind

The 2005 Texas Legislature approved a major transmission project, the Competitive Renewable Energy Zones (CREZ), to carry mostly wind energy generated in West Texas and the Panhandle to high-demand cities. The project was forecast to cost less than $5 billion but ballooned to more than $6.9 billion to build nearly 3,600 miles of transmission lines and dozens of substations.

The completed project has capacity to transmit about 18,500 MW of electricity to major load centers in ERCOT — that would serve more than 4 million Texas homes.

Consumers will pay for CREZ lines carrying wind energy for 15 to 20 years. The PUC estimates residential customers will pay roughly $5 to $7 per 1,000 kWh used. Based on the average household’s electricity use, that will cost $70 to $100 per year. An ERCOT official told the PUC in August 2014 that further expansion of the West Texas transmission grid could cost an additional $2 billion.

An ERCOT study is under way to provide new and improved transmission from Panhandle wind generation that extends outside its service area. The Panhandle Renewable Energy Zone could provide transmission lines (expanded from the existing CREZ) that would transport electricity to the populated areas of Texas where demand is increasing. No price tag has been identified for these new transmission lines.

The PUC has begun to study whether future transmission infrastructure costs should continue to be paid by all ratepayers or whether electricity generators — specifically renewables that are located far from where the energy is used — should be required to fund any of the costs.

As discussed at the April 17th open meeting, I would like to open a project to look at ERCOT’s prospective system upgrades, ancillary services, and the transmission planning process related to renewable resources, as well as problems that have arisen as part of the CREZ build-out. The unique characteristics and often-remote locations of renewable resources pose challenges to the electric grid, and those challenges are increased as the volume of wind on the system increases. For example, some of the series compensated transmission lines that are part of the CREZ build- out can cause sub-synchronous oscillation issues that must be resolved in order to avoid damage to the transmission grid and generation resources. The Panhandle region is currently experiencing so much interest from wind developers that there is a concern that the overall system strength will be negatively affected unless the infrastructure is updated.

The Federal Production Tax Credit was started in 1992 in order to spur a developing technology and allow it to gain the momentum necessary to make it commercially viable. Now, 22 years later, there can be no doubt that renewable technology-especially wind and solar-are mature industries. Every year when Congress extends the Production Tax Credit we are told that it will be the last year. Although the credit expired in December, the Senate Finance Committee recently approved a $13 billion, two-year renewal. I fear that this credit will once again be extended.

The Federal Production Tax Credit distorts wholesale electric markets, including the ERCOT market. With wholesale rates that hover around $40 per MWh in ERCOT, a federal program that pays wind generators $23 per MWh ultimately destroys the economic underpinnings of the wholesale competitive electric market. As wind installations continue and wind capacity in our market becomes a larger percentage of ERCOT capacity, not because it makes sense from an economic standpoint but because investment is driven by a federal government subsidy, our market faces the very real possibility of losing base load generation. As former Senator Phil Gramm stated in a December 25, 2012 Wall Street Journal article: “The costs of wind subsidies are extraordinarily high – $52.48 per one million watt hours generated, according to the U.S. Energy Information Administration. By contrast, the subsidies for generating the same amount of electricity from nuclear power are $3.10, from hydropower 84 cents, from coal 64 cents, and from natural gas 63 cents.”

While this Commission has no ability to change what Congress does, we do have an obligation to Texans to periodically review whether our rules appropriately assign cost to those who cause those costs. I would like to explore the costs of system upgrades, the costs to maintain and operate the current system, and the allocation of those costs specifically related to renewable resources.

Some of the transmission lines built as part of CREZ include series compensation that has the potential to cause sub-synchronous oscillation if the series capacitors that have been installed are taken out of bypass mode. This issue is a consequence of expanding the system to access resources that are located far from load centers. This Commission needs to decide how to address the existing problem, how to avoid this problem in the future, and how to resolve the cost allocation issues o f mitigating this risk.

Due to the amount of wind generation that we are now expecting on the transmission lines in the Panhandle, stability concerns and weak system strength will present significant challenges in that area. ERCOT has released a study that recommends system upgrades to address this issue. The transmission facilities in the Panhandle region installed as a part of CREZ included reactive equipment to support 2,400 MW of wind. As we see wind online in excess of 2,400 MW, the system strength will suffer. Under weak grid conditions, a small variation of reactive support results in large voltage deviations. These potential grid stability issues raise fundamental policy questions. For example, should we ask electric customers to fund further investment in the transmission system to improve stability or should some of the risk be borne by generators? When I review the PURA provisions that approved construction ofthe CREZ lines, it is obvious to me that the Texas Legislature intended that wind developers should have skin in the game but we need to further flesh out what that means as wind generation becomes an increasingly large percentage of installed capacity in the ERCOT market.

ERCOT is currently evaluating an ancillary services redesign, which gives us an opportunity to examine our current mix of services, those contemplated for the future, and the costs associated with these products. One of the reasons that ERCOT is exploring potential improvements to ancillary services is because some new resources expected to be added to the ERCOT system bring with them additional challenges. Given ERCOT’s changing resource mix, I would like to look at whether there are ancillary services costs that are incurred specifically because of the unique nature ofrenewable resources.

The ERCOT Board instructed ERCOT to review its transmission planning process. One issue
that I would like to explore here at the Commission is whether the production cost savings test, most recently adopted by the Commission in March 2012, is appropriate for analyzing the
benefits of transmission projects, especially projects to address transmission limitations and voltage stability mitigation that will be needed to address a system heavily weighted with wind generation, with a production cost ofzero.

I request that Commission Staff open a project with the title “ERCOT Planning and System Costs Associated with Renewable Resources.” If we encounter major policy issues in this rulemaking that we believe cannot be resolved by PURA, we can seek Legislative guidance by including these topics in our Scope of Competition report.

Over the last decade, well-intentioned policymakers in Germany and other European countries created renewable energy policies with generous subsidies that have slowly revealed themselves to be unsustainable, resulting in profound, unintended consequences for all industry stakeholders. While these policies have created an impressive roll-out of renewable energy resources, they have also clearly generated disequilibrium in the power markets, resulting in significant increases in energy prices to most users, as well as value destruction for all stakeholders: consumers, renewable companies, electric utilities, financial institutions, and investors.

Accordingly, the United States and other countries should carefully assess the lessons learned in Germany, with respect to generous subsidy programs and relatively rapid, large-scale deployment and integration of renewable energy into the power system. This white paper is meant to provide further insight into the German market, present an objective analysis of its renewable policies, and identify lessons learned from Germany, and to a lesser degree, other European countries.

The rapid growth of renewable energy in Germany and other European countries during the 2000’s was due to proactive European and national policies aimed at directly increasing the share of renewable production in their energy mixes through a variety of generous subsidy programs. Two main types of subsidy programs for renewable power developed in Europe include feed-in tariffs (FITs), which very quickly became the policy of choice for Germany and many other European countries, and quota obligation systems.

FITs are incentives to increase production of renewable energy. This type of subsidy guarantees long-term (usually for 20 years) fixed tariffs per unit of renewable power produced. These fixed tariffs normally are independent of market prices and are usually set by the government, but can be structured to be reduced periodically to account for technology cost decreases. The level of the tariffs normally depends on the technology used and the size of the production facility. Because of their generosity, FITs proved capable of quickly increasing the share of renewable power, but since the FITs are set administratively, it is difficult to meet renewable energy goals in the most cost-effective way possible.

The quota system is the European equivalent to the Renewable Portfolio Standard used in the United States. Whereas FIT programs set the price for the resources and let the market achieve whatever level it can at that price, the quota system is a market based system that sets the desired amount of renewable resources and lets the market determine its price. Under the quota system, compliance is proven through renewable certificates that can usually be traded.

Germany used FITs to help finance its energy policy, “Energiewende” (the energy transformation), that calls for a nuclear-free and carbon-reduced economy through a vast deployment of renewable technologies.

Because FITs levels were administratively driven and slow to adapt to the evolution of the solar market, the incentive became excessively generous, which initiated an uncontrolled development of renewables, which, in turn, created unsustainable growth with a myriad of unintended consequences and lessons learned. Accordingly, this analysis will focus on Germany, whose FIT policies allowed it to realize the highest production of non-hydro renewable electricity (wind and solar) in Europe.

The most important lessons learned include:

Policymakers underestimated the cost of renewable subsidies and the strain they would have on national economies. As an example, Germany’s FIT program has cost more than $412 billion to date (including granted and guaranteed, but not yet paid FIT). Former German Minister of the Environment Peter Altmaier recently estimated that the program costs would reach $884 billion (€680 billion) by 2022. He added that this figure could increase further if the market price of electricity fell, or if the rules and subsidy levels were not changed. Moreover, it is estimated that Germany will pay $31.1 billion in subsidies for 2014 alone. A recent analysis found that from 2008 to 2013, Germany incurred $67.6 billion (€52 billion) in net export losses because of its high energy costs, compared to its five leading trade partners. Losses in energy intensive industries accounted for 60 percent of the total losses. This was further highlighted by a recent International Energy Agency report, which stated that the European Union (EU) is expected to lose one-third of its global market share of energy intensive exports over the next two decades due to high energy prices, expensive energy imports of gas and oil, as well as costly domestic subsidies for renewable energy.

Retail prices to many electricity consumers have increased significantly, as subsidies in Germany and the rest of Europe are generally paid by the end users through a cost- sharing procedure. Household electricity prices in Germany have more than doubled, increasing from €0.14/kilowatt hour (kWh) ($0.18) in 2000 to more than €0.29/kWh ($0.38) in 2013. In Spain, prices also doubled from €0.09/kWh in 2004 to €0.18/kWh in 2013 ($0.12 to $0.23) while Greece’s prices climbed from €0.06/kWh in 2004 to €0.12/kWh in 2013 ($0.08 to $0.16). Comparatively, household electricity prices in the United States average $0.13/kWh, and have remained relatively stable over the last decade.

The rapid growth of renewable energy has reduced wholesale prices in Germany, with adverse consequences on markets and companies. Large subsidies and guaranteed interconnection to the grid for renewable energy led to unexpected growth over the last 10 years in Germany and elsewhere. The merit order in Germany’s wholesale markets switched as renewables, with a zero variable cost of production, take precedence over thermal plants. As a result, wholesale prices in Germany for base load have fallen dramatically from €90-95/megawatt hour (MWh) in 2008 to €37/MWh in 2013. This has created a large amount of load and margin destruction for utilities that built and financed thermal plants. Many new gas-fired power plants have been rendered uneconomical, leaving owners to shore up their balance sheets by undertaking large divestitures of some of their holdings, as well as by reducing their operational costs. The impact to utilities’ shareholder value has been dramatic and has come on top of the impact of the global financial crises, and, in the case of Germany, the decommissioning of nuclear power. The German utilities have seen their stock plunge by nearly 45 percent since 2010. Some power plant operators in Germany and other countries, like the United Kingdom, are now calling for capacity payments to ensure that reliability is maintained and not threatened by the shutdown of various thermal power stations.

The wholesale pricing model has changed as a result of the large renewable energy penetration. In the past, wholesale prices followed the demand curve, but in Europe they now react to the weather; going down when the sun shines and the wind blows, and up when—at times of high demand—the sun does not shine and the wind does not blow. Price forecasts and power trading require more skill sets and different know-how, including weather forecasting.

Fossil and nuclear plants are now facing stresses to their operational systems as these plants are now operating under less stable conditions and are required to cycle more often to help balance renewables’ variability. Investments in retrofits will be required for these plants in order to allow them to run to these new operational requirements. Moreover, renewable resources are dramatically changing thermal plants’ resource planning and margins. As a result, many of these plants are now being retired or are required to receive capacity payments in order to economically be kept online.

Large scale deployment of renewable capacity does not translate into a substantial displacement of thermal capacity. Because of the variability of wind and solar, there are many hours in the year during which most generation comes from thermal power plants, which are required to provide almost complete redundant capacity to ensure the reliability of the system. In turn, grid interventions have increased significantly as operators have to intervene and switch off or start plants that are not programmed to run following market- based dispatching. For instance, one German transmission operator saw interventions grow from two in 2002 to 1,213 in 2013. It is higher amounts of renewables with low full load hours relative to the total portfolio of power production that creates greater variability and strains on the grid. In the case of Germany, it is the large-scale deployment of both wind and solar that has impacted the entire system.

Large-scale investments in the grid are being required to expand transmission grids so they can connect offshore and onshore wind projects in the north of Germany to consumers in the south of the country. The total investment cost for the build-out of German onshore and offshore transmission systems is estimated to be around $52 billion (€40 billion) over the next 10 years. Moreover, the grids are now being challenged to meet the dynamic flows of variable renewables and require significant additional investment to accommodate increased penetration of renewables. All of these costs will ultimately be passed on to electricity consumers. This has not gone unnoticed in Germany or in the EU. A report was released in late February 2014 by an independent expert commission mandated by the German government, which concluded that Germany’s current program of incenting renewables is an uneconomic and inefficient means to reduce emissions and therefore should be stopped. Moreover, the European Commission released new guidelines on April 9, 2014, with effect starting in 2017 that will correct market distortions. It will essentially ban all FIT subsidies and introduce technology agnostic auctions as the only incentives for renewables.

Overgenerous and unsustainable subsidy programs resulted in numerous redesigns of the renewable support schemes, which increased regulatory uncertainty and financial risk for all stakeholders in the renewable energy industry. As the lessons above show, some European renewable energy regulatory regimes were inappropriately structured, gamed by market players, or made obsolete by market conditions. As a result, governments and regulators corrected unsustainable regulatory regimes by reducing the level of subsidies, sometimes retroactively, and modifying the rules of the programs. These changes often resulted in significant value destruction to various renewable players and their respective investors. This continued regulatory uncertainty across Europe is increasing the cost of capital to European renewable companies, which the rating agency Fitch just recently highlighted as the most likely sector in the European energy market to receive a downgrade in 2014.

These lessons learned are important and provide factual analyses to assist other countries’ electric industry stakeholders’ in creating more technically-efficient, cost-effective and sustainable ways to integrate renewable energy.

U.S. stakeholders should take into consideration the lessons learned from Germany and Europe:

Utilities should incorporate those lessons into their strategic planning, load forecasting, financial planning, trading, and regulatory affairs organizations. Decisions about current and future investments should then be made with this new analysis in mind.

Renewable companies should calculate appropriately the true costs of grid enhancements, capacity, and other important measures when submitting their plans to commissioners, investors, and other stakeholders.

Legislators and regulators should use the lessons learned from large scale integration of renewables in Germany and elsewhere in Europe to ensure a stable transition of renewables as part of the overall power portfolio while ensuring high reliability of power, stability of pricing to all users, as well as minimal value destruction to both utilities and renewable companies.

Finally, consumers must be made aware of the tradeoffs to a large portfolio of renewables and the necessary requirement for a smooth transition as part of the overall power portfolio.

In conclusion, the lessons learned in Europe prove that the large-scale integration of renewable power does not provide net savings to consumers, but rather a net increase in costs to consumers and other stakeholders. Moreover, when not properly assessed in advance, the rapid, large scale integration of renewables into the power system will ultimately lead to disequilibrium in power markets, as well as value destruction to renewable companies, utilities, and their respective investors. The U.S. has the opportunity to incorporate these lessons learned to ensure the sustainable growth of renewable energy over the long-term, for the benefit of all customers.